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Saturday, 6 February 2010

Avoid up-front commissions

A number of companies charge up-front commissions – sometimes called brokerage fees. My strong advice is never to deal with a wine investment company that charges an up-front commission. Very often this up-front commission will add 20%-25% to the purchase price. Although the investment company may have to add this commission to their prices in order make money as they are likely to be buying stock from one larger UK brokers, there is no reason why an investor should support a flawed business model. If you cannot offer wines at a reasonable market price then you shouldn't be selling a wine investment package. For the investor the sensible thing is to cut out the unnecessary additional link in the chain and buy from a cheaper source assuming they are well established.

Paying a an upfront commission makes no sense however it is dressed up: companies trumpet that declaring their upfront commission means that their pricing is 'transparent'. What matters is the price the investor pays for the wine – full stop. An upfront commission makes no sense because generally buying the wine, with certain rare exceptions like Pétrus and Le Pin, is the easy bit. It is much harder to sell wine, especially at a good price. Usually companies charging an upfront commission will not levy a commission on sales. Fine but what incentive do they have to sell your wine?

What happens if the company has ceased trading when you want to sell your wine? You will be faced with paying a seller's commission to another company. This means paying twice over (both when you bought and when you sold) and it is worth remembering that wine tends to be a medium to long-term investment.

Say no to companies charging an upfront commission on investment wines.

13 comments:

We are members of Liv-ex and can trade our wine and buy. If our client pays a 10% up front fee on their wine, we do not charge to sell their wine and do so on liv-ex for the current average bid price. As an example Lafite 08 is being sold on liv-ex for between 4950 and 5850, and two bids today were on for 5750. We would sell at 5250 if listed today and this money would be returned to the client. If they has bought from us in November last year, the Lafite 08 would have cost 4100 plus 10% totalling 4510. This means if that same client sold this wine today they would make a profit of 740 pounds with no deductions. As a reference if they sold their wine to Farr Vintners, Berry Bros, Bordeaux Index or similar, they would have bought in November for 4200 and sold back to them today at 4900 minus 10% brokerage fee, which would total 490 pounds meaning they would recieved 4410. This is a profit of 210 pounds. This quite clearly shows that investing with us on this example is far better than investing with an end loaded wine merchant. As members of Liv-ex we do gaurantee to our clients to see wine at any time if they wish. We would never deprive a customer of their sale and it is written into our T&C's.

I would welcome any comments from a merchant/broker who charges a seller's commission on Cult Wines Ltd's example and figures.

Your example suggests a possible pattern of frequent trading, in which case Customs and Excise may well decide that the profits are taxable.

More typically wine investment is medium to long term and there are a host of reasons, including retirement, being taken over or just plain bad luck, why a company may cease trading. There is, therefore, a significant risk that a company that charges a buyer's commission may not be still in business when the investor wants to sell their wine.

A further disadvantage of paying more than you need to for your wine is that should you decide to drink the wine you will pay VAT on taking the wine out of bond. In the case of your Lafite example that's an additional £54.24 (actually it would be slightly more as duty has to be added before the vat is calculated).

The VAT point is universal whether you use a front loaded or end loaded company. If you want to drink it, you will pay the same anywhere you buy from. It is important to remember that we are merchants as well and sell wine to the trade and to customers without a managment fee. We have customers such Nickolls & Perks and many others. If such a person wished to store

I have received the following comment from Cult Wines Ltd, which I have amended so that it is relevant to this post.

I should make it clear that I have made no comment on this blog or elsewhere about the pricing policies of Cult Wines Ltd. My comments here about 'up front commissions' are general and are similar in tenor to comments made several years ago on www.investdrinks.org

Amended comment:

'I will only say this once more for clarification. We sell wine at correct market prices (see website). We offer a choice for specific wine investors. If they wish to store and sell their wine themselves they can buy from us at market value, if however they are novices and want to have an investment package they can choose to pay 10% at the beginning and we will sell their wine for free on Liv-ex at the end of the investment period.

We offer both options, up front & back end investment packages. Many companies offer this choice and we are no different.'

Jim I think your point is well made, if they are selling an investment they must surely back themselves to sell the wine at a profit in the future?? What they are basically saying is you buy the wine, which we profit from over at a price above market, you take all the risk and if we feel like it we will sell your wine for you, even though we have no incentive to, because we have already made our money.

I suppose though commercially, if they did not make the up front commission they would go out of business. Waiting 4-5 years, like the more established wine funds* do to sell the wine at a decent profit is not exactly a good model for them, unless of course they have capital to last that period of time.

Interesting that Cult wines have confirmed that they are selling investment packages. I thought they had said in an earlier post they just sell wine? Does this mean Cult Wines are authorised by the FSA to sell investments?

Yes there does appear to be a confusion of terms here, which was apparent in the Press Release of 22nd January 2010.

My guess is that 'investment packages' refers to clients buying cases of wine and the company arranging storage etc. This would not qualify as a collective investment scheme and so not come, for the moment at least, under the control of the FSA. The company or its officers are not authorised by the FSA but if my understanding is correct they do not need to be.

What exactly is an upfront commission? Take the worst price from Liv-Ex and add a percentage? How can that be an investment? or investment package. What about the value of money overtime? Paying an upfront commission is jargon, what it really is, is a clever excuse to rip off the consumer. If companies had any experience of the ‘actual’ wine business, rather than their ‘investment schemes’ they would know that buyers are very hard to find and that going through the big three is where they will end up selling their wine anyway. I didn't know auctions sold your wine for free? Anyone who has wine with these companies should phone up any of the companies listed and ask what their wine is worth today, because that is what is important. Because that will be 10 - 15% below liv-ex mid-price. Paying 30% over market today will mean they will barely break even after 5 years, with the cost of money at a measly 5% probably a compound loss. When is this nonsense going to stop!

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